5 steps to dramatically improve your spend management strategy

The most effective procurement leaders are not only concerned with sourcing and onboarding new vendors but also understanding company spend across all suppliers.

This process, known as spend management, is critical for ensuring every dollar is spent wisely and contributes toward a healthy vendor ROI.

Spend management is about creating clear purchasing policies, ensuring spend occurs through the right channels and processes, and tracking where every dollar goes to optimize spending habits.

Learn what spend management looks like in practice, and discover five steps to take right now to make your spend management strategy more effective.

What is spend management?

Spend management is a component of strategic sourcing and procurement processes that focuses on monitoring and controlling how your company spends money.

The primary focus of spend management is reducing and, most importantly, optimizing costs to improve ROI on organizational spend.

Spend management is a system of processes and tactics that finance and procurement teams collaborate on to:

• Reduce wasteful spend
• Improve spending efficiency
• Prepare budgets and forecasts more effectively

A solid spend management strategy not only examines spend at the location, department, and category levels, it also analyzes spending at the line level to identify exactly where spending can be optimized.

For instance, your financial reports show a $20,000 annual expense for your CRM platform. This might not be cause for concern in and of itself.

Drilling deeper, however, you find that $4,000 of this is out-of-contract spend for SMS and phone call overages from your sales team. This is an area for optimization, and you may have an opportunity to renegotiate the terms of your contract in light of your new usage requirements.

What is involved in spend management?

An effective spend management strategy incorporates a host of tactics to optimize business spend:

• Establishing company spending policies, such as communicating an approval procedure that outlines who can purchase what, through what pathways employees must seek purchase approval, and when the purchasing process should be invoked.
• Vetting suppliers to mitigate common vendor risk types (such as financial, operational, and reputation risk).
• Negotiating discounts with new and existing providers to minimize total expenditure.
• Setting spending limits that inform department leaders of the maximum amount they can spend before seeking approval.
• Collecting competitive bids during the sourcing process to identify the most cost-effective supplier.
• Consolidating software expenses by identifying where multiple departments have purchased licenses for similar products (generally outside the procurement process) and consolidating accounts and/or platforms.

Why implement a spend management strategy?

Aside from the fact that 40 to 80 percent of your total costs are to external suppliers (so being on top of that expenditure just makes sense), adopting effective spend management processes helps you to:

• Determine where you’re losing money. For example, identifying rogue spending patterns to eliminate through tighter spending policies.
• Minimize redundant purchasing. For instance, underutilized or unused software, duplicate licenses, processing and payment errors (and associated charges), and accidental purchase orders.
• Improve capital investment. By cutting out wasteful spending, you have more capital to allocate to growth initiatives.

4 spend management categories

Spend management strategies look at expenditures across four categories.

Direct spend

Direct spending is any expenditure related to the raw inputs required to create the product or service you sell.

For businesses manufacturing physical products, this is likely to be the biggest spending category. Service-based companies (e.g., marketing agencies and consulting firms) tend to allocate less to direct spending than companies that produce a physical product.

Indirect spend

Indirect spending is the expenditure that’s required to keep your business running, but that doesn’t go directly into the production of your product or service.

Accounting, legal services, maintenance, rent, utilities, and most purchase of office equipment are all examples of indirect spend.

Tail spend

Tail spend typically makes up around 20 percent of your total spend but accounts for as much as 80 percent of your purchases. That is, most of your purchases will be considered tail spend, despite making up less than a quarter of the total spend amount.

Tail spending includes any expenditures that don’t fit neatly into the two larger categories (direct and indirect spend).

This is generally because the purchase is infrequent or one-off (such as purchasing a new kiosk iPad) or because the dollar value is too low to go through your procurement approval process.

Rogue spend

Rogue spending (also known as maverick spending) covers expenditures that should go into the indirect spend category but do not occur inside the procurement process. For instance, an emergency technology purchase made on a corporate card is a rogue spend.

Categorizing spend accurately is important, as your strategy will look at the consequences of spend in each category differently. For instance, with rogue spend, your goal is to minimize or eliminate it altogether. With direct spending, the goal may not necessarily be to minimize total spend but to optimize expenditure to maximize ROI.

5 Steps to improve the spend management process

1. Manage all spend in a centralized location

In order to accurately track all of your business expenditures, it’s crucial to centralize financial data storage for easy spend analysis.

Top procurement leaders use spend management platforms as this central hub. These platforms not only act as a data repository but provide insights and benefits to supercharge your spend management strategy:

• Automated approval workflows help you simultaneously save time and ensure internal compliance during the procurement process.
• Price benchmarking shows you what other companies spend with each vendor, empowering your contract negotiation discussions and reducing your overall spend.

• Spend visibility at multiple levels allows you to review expenditure at the category level or drill down to specific line items to identify rogue and tail spend culprits.

• Spend analytics like usage metrics, spending patterns, and historical price increases.

2. Verify and cleanse existing spend data

Getting to a “day one” with your spend management tool might take a little setting up.

Import all of your existing data from spreadsheets or any existing spend management system, then systematically comb through it to:

• Correct spelling mistakes or numerical errors
• Remove any duplicate entries
• Ensure all spend is recorded in the same currency

Depending on the complexity of your existing spend data management (perhaps you already have this information recorded), go through and categorize data based on:

• Location
• Department
• Spend category (direct, indirect, tail, or rogue)

This process of verification and data cleansing sets you up with an accurate look at your spending habits as they stand today. Now you can look for savings opportunities.

3. Assess the status quo

Analyze your current spending behaviors and report on expenditure by department, line item, category, employee, supplier, and financial period.

Ask:

• Are there any immediate problem areas? E.g., one employee is spending much more than others, or tail spend accounts for too high a percentage of total expenditure.
• How has spending changed over time? E.g., increasing costs with certain suppliers or departments.
• How does actual spending compare with the budget? Review this across multiple dimensions (category, department, line item).

As part of this process, conduct an analysis of your existing supplier relationships.

Which are the top performers, and which are falling beyond their contract KPIs? Which presents the highest degree of risk to your business? With which vendors has your cost been increasing, and is this cost increase justified (e.g., you’ve added more seats to a software plan)?

The answers to these questions guide your need to find new suppliers or renegotiate agreements with existing ones.

4. Renegotiate contracts where possible

Renegotiating supplier agreements is an ideal place to start optimizing your spend management.

Contracts already up for or approaching renewal should be your first stop, followed by open-term agreements that don’t have a fixed end date. Fixed-term contracts are less open to negotiation by nature, but that doens’t mean you can’t open the conversation.

Say, for instance, you have a 12-month agreement with your project management software supplier, which stipulates terms of $55 per month, per user, for 80 licenses.

You’re six months into the contract, and due to rapid growth, you now have 120 users with active licenses. This could be an opportunity to renegotiate the per-user price and sign a new contract. Organize a meeting with the vendor, explain the situtation and what it means for them (in terms of the additional revenue you’re provding them), and then propose a new pricing structure.

Improve your negotiation skills with our guide: How to negotiate a software contract.

5. Look for areas of overlapping spend

Overlapping SaaS purchases are more common than you might think, particularly if your software buying procedures have been less than stringent to date.

The most common example is two departments purchasing licenses for similar products. For example, your admin and marketing teams buy project management platforms separately.

Look for areas of overlapping spend and attempt to eliminate them. In this example, work with department leaders to consolidate both departments into one platform and negotiate a better deal with the supplier you choose (as you’ve upped your user account).

Vendr’s team of SaaS buying experts help you automatically identify areas of overlapping spend and provide assistance for reducing it.

Vendr solves SaaS strategic spend management

Vendr is the software buying platform that makes SaaS spend management easy and effective.

• Use automation to eliminate manual processes, streamline approval workflows, and ensure employees comply with spend and supplier management processes.
• Leverage our library of SaaS spending and expense data and team of software buying experts to negotiate better with vendor stakeholders and lower your monthly software payables.
• Access real-time savings data to understand the impact of your spend management strategy on your bottom line.
• Improve your contract management processes with a central hub for contract performance monitoring.

Discover just how much you’re overspending today with our free cost savings analysis.